Paying Yourself from Incorporation in Canada: A Comprehensive Guide

Paying yourself from an incorporated business in Canada involves several considerations and steps. This guide will provide a detailed overview of the main methods and processes you should follow, ensuring compliance with Canadian tax laws and regulatory requirements.

1. Salary

Employee Status

As a shareholder of your corporation, you can also be employed by it. This requires setting yourself up on the payroll system, which involves tracking time worked, generating pay stubs, and managing benefits.

Withholding Taxes and Payroll Remittances

When you pay yourself a salary, you must also withhold and remit certain taxes to the Canada Revenue Agency (CRA). These include:

Income Tax: Withheld from each salary payment Canada Pension Plan (CPP): Contributions taken out of each salary payment Employment Insurance (EI): Premiums deducted from each salary payment

You are responsible for remitting these withholdings to the CRA on a regular basis, typically through electronic deposits or paper payments as stipulated by the CRA.

In addition to these deductions, payroll must be filed with the CRA on a quarterly or annual basis, depending on the number of employees and the amount of remittances. Proper record-keeping is essential for accurate payroll.

Benefits of Paying Yourself a Salary

By paying yourself a salary, you contribute to the Canada Pension Plan and can enjoy a more stable and predictable income. Salaries can be adjusted to optimize your tax situation, balancing your personal income tax rates with the corporate tax rates.

2. Dividends

Shareholder Distributions

If you hold shares in your corporation, you can distribute profits to yourself as dividends. Unlike salaries, dividends do not require payroll taxes or deductions.

Tax Treatment

Dividends are taxed at a lower rate than salaries. They are considered shareholder distributions and are not considered employment income. However, they do not contribute to the Canada Pension Plan.

While dividends provide a tax-efficient means of extracting profit, they do not offer the same level of earnings consistency as a salary. Choosing dividends over a salary can lead to a more complex and varied financial situation.

3. Combination of Salary and Dividends

Many business owners choose to use a combination of salary and dividends to optimize their tax situation. This approach can balance personal income tax rates and corporate tax rates, depending on the corporation's income level.

Striking the right balance between salary and dividends can help you achieve a tax-litigated approach that aligns with both your personal income needs and the overall strategy of your corporation.

4. Considerations

Tax Planning

Tax planning is crucial when deciding how to pay yourself from your incorporated business. Consulting with an accountant or tax professional can help you determine the best approach for your financial situation. Tax implications can vary significantly depending on your circumstances.

Corporate Structure

Your corporation's structure should be properly set up and in compliance with all regulatory requirements. A clear understanding of the legal and tax implications of your corporation's structure is essential to avoid fines and penalties.

Record Keeping

5. Additional Steps

Set Up a Payroll System

Using payroll software or hiring a payroll service can help you manage salary payments effectively. Payroll systems simplify the process of withholding and remitting taxes, keeping track of employee earnings, and generating necessary documentation.

File Corporate Taxes

Ensure that your corporation's tax returns reflect any payments made to yourself, whether they are salaries or dividends. Late filing can result in penalties and interest charges, so adhere to the deadlines specified by the CRA.

Conclusion

The method you choose to pay yourself should align with your financial goals, tax situation, and the overall strategy of your corporation. Always seek professional advice for tailored guidance tailored to your unique circumstances. Effective communication with your tax professionals can help you navigate the complexities of corporate taxation in Canada.